How to Lose at Highest and Best Offers

November 10, 2010 9:11 am

If you’ve been selling real estate for the past several years, it’s quite likely you’ve come up against this: there’s an REO foreclosure home, you have clients who want to buy it – but there are a lot of other Realtors who also have clients who want to buy it, because it’s very attractively priced as so many REOs tend to be.

Girded for battle, you submit your client’s offer, and then the listing agent turns around and says, “We have multiple offers, the bank wants your client to present us with your highest and best offer.”

The listing agent will usually tell you how many offers there are. Some agents will actually tell you how much the other offers are for – although I don’t, as my understanding is that my clients wish the other offer amounts to be kept in confidence.

Some agents think that if you tell other buyers what the highest offer is, you’ll end up getting more money for the property. My feeling is that when buyers know there are multiple offers, but do not know what those offers are for, that they will often act in fear of losing the property and come and bid higher. You see, if people knew they only needed to come up by $5,000 to win the property, they might only come up $5,000. However if they have no idea how much they need to bid in order to win – well, they might bid $10,000 or $20,000 higher, just to be sure. I see it happen all time. Highest and Best offers work well for my clients.

A lot of buyers and agents try to calculate, based on how many offers they’re competing against, how much they need to offer to be the winning bidder. To me, this is a losing proposition. There’s no way of really knowing how much the other people are going to offer. A lot of people figure this wrong, and they offer less than their true highest and best offer, but they think they’re offering more than everyone else is asking – and more often than not, they’re wrong. Many times I have heard agents say, after losing out at the highest and best round, “That really wasn’t their best offer, how much more do they need to offer?” Alas, you really only get one shot at highest and best – don’t pull any punches if you really want the property – really figure out what your highest and best is for the property, and offer that. That way, if you don’t win – no sweat, you would have needed to pay more than you thought the property was worth to you anyway.

Some banks have special forms they need everyone to sign in a Multiple Offer / Highest and Best offer situation. This form might be called by a variety of names, but let’s refer to it here as the multiple offer disclosure (MOD).

I have a listing right now where we had several offers in on it. One of the offers was from a lawyer, who apparently thinks he knows all about buying real estate from a bank. His first offer included an escalation clause. I let him know that the client doesn’t allow escalation clauses. We went a few rounds over that one before he finally submitted an offer without the escalation clause – a low offer, lowest of the bunch actually, and a fair amount below asking price. So much below asking price, in fact, that even if there hadn’t been any other offers, the bank would not have accepted his offer, since the listing is so new on the market.

Since we had multiple offers, the seller turned around and issued Highest and Best counter offers to all the buyers, and I sent the bank’s MOD (multiple offer disclosure) form to the various agents for the buyers to sign, in order that they acknowledge they are in a multiple-offer situation and we are seeking their highest and best offer. The forms were sent out along with some instructions to the buyer’s agents, and the instructions indicated that if the buyer does not return the multiple offer disclosure, the offer will be considered to be withdrawn.

The buyer who tried to submit the offer with the escalation clause (remember, he’s a fancy-pants lawyer) objected to the wording in the multiple offer disclosure and refused to sign it. Apparently he would waive too many rights if he signed it, boo hoo. I told the buyer’s agent that he must sign it if even if he doesn’t want to increase or otherwise modify his offer, and if he doesn’t sign it, his offer will be considered withdrawn.

And before I know it, the buyer wrote to me directly (his agent had forwarded the client some of my previous e-mails so he had my address) and said that if his offer is not presented, he would sick the DRE on me. The nerve!

To make a long story short, the asset manager confirmed that I was to withdraw the buyer’s offer unless I received the signed MOD. After all that, the buyer still refused to sign the disclosure, and his offer was withdrawn. Or rejected – apparently it mattered something to the buyer if his offer was considered withdrawn versus rejected. I’d hate to ask that guy what the meaning of is is. As it happens, in the seller’s offer management system, the final status is “Rejected/Withdrawn” – you say tomato, I say tomahto, but the client says both.

It’s a moot point – and actually it was moot the whole time – because again, this buyer wants offering less than everyone else. But here’s the lesson for everyone: in a multiple-offer situation, especially for a hot new REO listing, it’s not a winning strategy to offer significantly less than asking price. You’d never get it significantly less anyway because the property is new on market, so if you’re going to bid, bid strong – at least asking price, in my opinion – and if you really want the property, bid what it’s worth to you, which may be (and often is) considerably higher than asking price.

The other lesson is: sign the multiple offer disclosure when it’s presented to you. Don’t think you can bully your way past the listing agent – even if you can, you surely cannot bully your way past the bank itself. It’s their way or the highway, if you won’t sign their forms – they don’t care, they’ll blow you off and move right on to the next (much more cooperative) buyer.

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